Lektion 2: Demand. Ch 3.3 - 4-4.5

Question 1

Consumer behaviour:

Why is it necessary to know about the behaviour of consumers?

Answer 1

We want to solve two problems and that require knowledge about consumer theory :
One involving corporate policy and the other public policy

Question 2

Consumer behaviour:

What will consumer purchasing decisions help us to understand?

Answer 2

How changes in income and prices affect the demand for goods services and why the demand for some products are more sensitive than others to change in prices and income.

Question 3

Consumer behaviour:

In which steps is consumer behaviour best understood?

Answer 3

1. Consumer Preferences: The first step is to find a practical way to describe the reasons people might prefer one good to another. We will see how a consumer’s preferences for various goods can be described graphically and algebraically.
2. Budget Constraints: Of course, consumers also consider prices. In Step 2, therefore, we take into account the fact that consumers have limited incomes which restrict the quantities of goods they can buy. What does a consumer do in this situation? We find the answer to this question by putting consumer preferences and budget constraints together in the third step.
3. Consumer Choices: Given their preferences and limited incomes, consum­ ers choose to buy combinations of goods that maximize their satisfaction. These combinations will depend on the prices of various goods. Thus, understanding consumer choice w i l l help us understand demand—i.e., how the quantity of a good that consumers choose to purchase depends on its price.

Question 4

Consumer behaviour:

Which assumptions about consumer behaviour do we have? (What do consumers do?)

Answer 4

Consumers are rational in purchasing decisions. Chose one that maximizes.

Question 5

Consumer behaviour:

What are their preferences towards market baskets?

Answer 5

The theory of consumer behavior begins with three basic assumptions about people’s preferences for one market basket versus another. We believe that these assumptions hold for most people in most situations.

1. Completeness:
   Preferences are assumed to be complete. In other words, consumers can compare and rank all possible baskets. Thus, for any two market baskets A and B, a consumer will prefer A to B, will prefer B to A, or will be indifferent between the two. By indifferent we mean that a per­ son will be equally satisfied with either basket. Note that these preferences ignore costs. A consumer might prefer steak to hamburger but buy ham­ burger because it is cheaper.
2. Transitivity:
   Preferences are transitive. Transitivity means that if a consumer prefers basket A to basket B and basket B to basket C, then the consumer also prefers A to C. For example, if a Porsche is preferred to a Cadillac and a Cadillac to a Chevrolet, then a Porsche is also preferred to a Chevrolet. Transitivity is normally regarded as necessary for consumer consistency.
3. More is better than less:
   Goods are assumed to be desirable—i.e., to be good. Consequently, consumers always prefer more of any good to less. In addi­ tion, consumers are never satisfied or satiated; more is always better, even if just a little better.

Question 6

Consumer preferences:

What is a market basket?

Answer 6

Market basket (or bundle): List with specific quantities of one or more goods.
To know the following:  "Let's begin by thinking about how a consumer might compare different groups of items available for purchase. Will one group of items be preferred to another group, or will the consumer be indif­ ferent between the two groups?"

Question 7

Consumer preferences:
How do consumers select market baskets? H o w do they decide, for example, how much food versus clothing to buy each month?

Answer 7

Although selections may occasionally be arbitrary, consumers usually select market baskets that make them as well off as possible.

Question 8

What can we use an indifference curve for in relation to this? And what is an indifference curve?

Answer 8

Indifference curve: Curve representing all combinations of market baskets that provide a consumer with the same level of satisfaction.

An indifference curve represents all combinations of market baskets that pro­vide a consumer with the same level of satisfaction. That person is therefore indiffer­ent among the market baskets represented by the points graphed on the curve.

Given our three assumptions about preferences, we know that a consumer can always indicate either a preference for one market basket over another or indifference between the two. We can then use this information to rank all pos­ sible consumption choices.

Question 9

What is an indifference map?

Answer 9

To describe a person’s preferences for all combinations of food and clothing, we can graph a set of indifference curves called an indifference map.
Each indif­ference curve in the map shows the market baskets among which the person is indifferent.

It’s a graph containing a set of indifference curves showing the market baskets among which a consumer is indifferent.

Question 10

Can an indifference curve intersect?

Why/why not?

Answer 10

INDIFFERENCE CURVES CANNOT INTERSECT
If indifference curves (U1 and U2 intersect, one of the assumptions of consumer theory is violated. Accord­ ing to this diagram, the consumer should be indiffer­ ent among market baskets A, B, and D. Yet 6 should be preferred to D because 6 has more of both goods.

Question 11

Which form does an indifference slope have?

Answer 11

Recall that indifference curves are all downward sloping.
In our example of food and clothing, when the amount of food increases along an indifference curve, the amount of clothing decreases.

The fact that indifference curves slope downward follows directly from our assumption that more of a good is better than less.

If an indifference curve sloped upward, a consumer would be indif­ferent between two market baskets even though one of them had more of both food and clothing.

Question 12

What is meant by the term: budget constraint

Answer 12

Given the individual’s income and the level of prices, only some of the consumption bundles are affordable.

Question 13

What is meant by the term: Consumers’ choice

Answer 13

Is the favorite consumption bundle (”utility maximizing”) among all affordable bundles.

Question 14

So consumer behaviour depend on which 2 things?

Answer 14

1. preference – determine the choice

2. Budget –given income and level of prices of food/c not all is prefered.

Question 15

Assumptions about preferences

Answer 15

Preferences: ranking over all possible consumption bundles.

Four assumptions:

Completeness: Consumers can compare and rank all possible bundles (UA>UB or UAUB and UB>Uc → UA>Uc.

Non-satiation: More is better than less → UA>UA’ if A>A’.

Convexity: The consumer prefers a combination of two goods rather than having a lot of only one good.

Question 16

Indifference curve:

What is the The marginal rate of substitution ?

Answer 16

The Marginal Rate of Substitution says by how much should the quantity consumed in one good increase if the quantity in the other good has decreased by 1 unit for utility to remain constant.

The marginal rate of substitution reflects how the individual values one good versus another, his trade off between two goods.

The marginal rate of substitution depends on how much the individual is consuming of the two goods: if the individual is already (not) consuming a lot of one good, he may have a low (high) preference for that good.

Exp:
If utility is to be constant we have to stay at the indifference curve. It has to compensate; meaning what is shown at the drawing – 1 egg less, means we need more root of beers per week.
If i decrease eggs it means I value beer more. And vice versa. Meanss that your preferencec depends on how much you are consuming of the two.

The more egg, the less beer.
My preference for egg to root beer depends on how much of egg/beer i am already consuming.